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The Japanese banking crisis and economic growth: Theoretical and empirical implications of deposit guarantees and weak financial regulation

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  • Dekle, Robert
  • Kletzer, Kenneth

Abstract

An endogenous growth model with financial intermediation is used to show how government policies towards the financial sector can lead to banking crises and persistent growth slumps. The model shows how government deposit guarantees and regulatory forbearance can lead to permanent declines in the growth rate of the economy. The effects of inadequate prudential supervision on asset price dynamics under perfect foresight are also derived in the model. The policies that are used in the analysis are based on essential features of Japanese financial regulation. The implications of the model are compared to the experience of the Japanese economy and financial system during the 1990s. We find that the dynamics predicted by our model are generally consistent with the recent behavior of economic aggregates, asset prices and the banking system for Japan. A policy implication of the model is that the impact on future economic growth depends upon the length of time the government fails to enforce loan-loss reserving by banks.
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  • Dekle, Robert & Kletzer, Kenneth, 2003. "The Japanese banking crisis and economic growth: Theoretical and empirical implications of deposit guarantees and weak financial regulation," Journal of the Japanese and International Economies, Elsevier, vol. 17(3), pages 305-335, September.
    • Handle: RePEc:eee:jjieco:v:17:y:2003:i:3:p:305-335
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    2. Narayana R. Kocherlakota & Ilhyock Shim, 2007. "Forbearance and Prompt Corrective Action," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(5), pages 1107-1129, August.
    3. HOSONO Kaoru, 2009. "Financial Crisis, Firm Dynamics and Aggregate Productivity in Japan," Discussion papers 09012, Research Institute of Economy, Trade and Industry (RIETI).
    4. Millard, Stephen & Nicolae, Anamaria, 2014. "The effect of the financial crisis on TFP growth: a general equilibrium approach," Bank of England working papers 502, Bank of England.
    5. Kletzer, Kenneth & Spiegel, Mark M., 2004. "Sterilization costs and exchange rate targeting," Journal of International Money and Finance, Elsevier, vol. 23(6), pages 897-915, October.
    6. Kletzer, Kenneth, 2004. "Liberalizing Capital Flows in India: Financial Repression, Macroeconomic Policy and Gradual Reforms," Santa Cruz Department of Economics, Working Paper Series qt3kj2w649, Department of Economics, UC Santa Cruz.
    7. Chakraborty, Suparna, 2006. "Amplifying Business Cycles through Credit Constraints," MPRA Paper 1808, University Library of Munich, Germany.
    8. Kletzer, Kenneth, 2004. "Liberalizing Capital Flows in India: Financial Repression, Macroeconomic Policy and Gradual Reforms," Santa Cruz Department of Economics, Working Paper Series qt9h27k0ff, Department of Economics, UC Santa Cruz.
    9. Kenneth M. Kletzer, 2004. "Liberalizing Capital Flows in India: Financial Repression, Macroeconomic Policy, and Gradual Reforms," India Policy Forum, Global Economy and Development Program, The Brookings Institution, vol. 1(1), pages 227-275.
    10. Suparna Chakraborty, 2005. "Real Estate Prices, Borrowing Constraints and Business Cycles -A Study of the Japanese Economy," Macroeconomics 0504012, University Library of Munich, Germany.
    11. Robert Dekle & Kenneth Kletzer, 2004. "Deposit Insurance, Regulatory Forbearance and Economic Growth: Implications for the Japanese Banking Crisis," CESifo Working Paper Series 1136, CESifo.
    12. Keiichiro Kobayashi, 2003. "A Theory of Banking Crises (Part 1)," Discussion papers 03016, Research Institute of Economy, Trade and Industry (RIETI).
    13. Chakraborty, Suparna & Allen, Linda, 2007. "Revisiting the Level Playing Field: International Lending Responses to Divergences in Japanese Bank Capital Regulations from the Basel Accord," MPRA Paper 1805, University Library of Munich, Germany.
    14. Chakraborty, Suparna, 2009. "The boom and the bust of the Japanese economy: A quantitative look at the period 1980-2000," Japan and the World Economy, Elsevier, vol. 21(1), pages 116-131, January.
    15. Keiichiro Kobayashi, 2003. "Deflation Caused by Bank Insolvency," Discussion papers 03022, Research Institute of Economy, Trade and Industry (RIETI).
    16. Zoe Venter, 2019. "The Role of Central Banks and the Political Environment in Financial Stability: A Literature Review," Working Papers REM 2019/89, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    17. W. R. Garside, 2012. "Japan’s Great Stagnation," Books, Edward Elgar Publishing, number 14624.
    18. Adina APÃTÃCHIOAE, 2014. "The Deposits Of Romanian Credit Institutions In Times Of Crisis," Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, issue 13, pages 103-127, June.
    19. Barseghyan, Levon, 2010. "Non-performing loans, prospective bailouts, and Japan's slowdown," Journal of Monetary Economics, Elsevier, vol. 57(7), pages 873-890, October.

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